IMF: Brexit fallout will shave eurozone growth in 2016, 2017

WASHINGTON – Britain’s decision to leave the European Union will trim economic growth this year and next across the 19 countries that share the euro currency.

In its annual checkup of the eurozone economy, the International Monetary Fund said Friday that the region’s economy will grow 1.6 per cent this year and 1.4 per cent in 2017. Before the so-called Brexit vote, the IMF was projecting 1.7 per cent growth this year and next.

The downgrade reflects rising uncertainty, volatility in financial markets and a likely drop in exports to Britain following the vote.

The surprising June 23 decision means the United Kingdom must renegotiate its trade and immigration arrangements with the EU. Many businesses are likely to delay investments in Britain and Europe until they know what the new rules will be.

“This is our very early thinking and assessment,” said Mahmood Pradhan, deputy director of the IMF’s European department. “It’s very, very early days to have any strong sense of confidence” about how the UK-EU relationship will work out.

Pradhan said the IMF forecast was based on a relatively optimistic assumption: that Britain would negotiate an arrangement like the one Norway has, giving it access to the EU’s single market of 500 million people but without EU membership.

Before the Brexit vote unsettled things, the Eurozone economy was showing signs of improvement. Lower oil prices and easy money policies by the European Central Bank were supporting faster growth. The eurozone economy grew 1.7 per cent last year, fastest since 2010.

Still, the IMF warns that the Eurozone economy faces longer-term problems: aging populations; sluggish productivity; banks so saddled with bad old loans that they’re reluctant to make new ones; reluctance to pursue reforms (such as overhauling taxes that discourage work) that would make European economies more efficient.